SIGN UP FOR INSIGHTS

Money

The Hidden Public Procurement Costs of the Coronavirus

Thursday, April 9, 2020

The coronavirus pandemic is not just a crisis of public health; it is a nightmare for public procurement, argues Bryane Michael of the Asian Institute of International Financial Law at The University of Hong Kong. Governments around the world are preparing for a tidal wave of Covid-19-related spending that will allow state agencies to avoid many of the usual controls on expenditure, upend national budgets and contribute to vast financial wastage. Such pitfalls can be avoided and unnecessary expenditure can be mitigated. Solutions should be implemented for when the next crisis comes.

The Hidden Public Procurement Costs of the Coronavirus

Ventilators ready to ship: Emergency response to a crisis such as the Covid-19 pandemic would be more efficient if laws eased procurement through such mechanisms as supplier pre-qualification (Credit: Robert Kneschke / Shutterstock.com)

The coronavirus crisis is going to be very expensive. As usual, most pundits point directly to the usual US$1 trillion figure often bandied about during any crisis, whether about climate change, heart disease or even crumbling water pipes. Yet, governments alone will likely spend 10 times that on their Covid-19 responses – making the impact on the global economy far larger. They will spend billions of dollars on sector-specific aid and hundreds of millions on test kits, among other measures. The scramble for medical and protective equipment from masks to ventilators and for potential treatments (e.g. hydroxycholoriquine) has already generated an intense global procurement race that has turned ugly with even US states bidding against each other.

In the Asia-Pacific region alone, New Zealand, with a population of just 4.8 million, has promised to spend US$8 billion (or 4 percent of gross domestic product) to revive the economy. Singapore, population 5.6 million, plans to set aside US$4.4 billion. These amounts will fall completely outside the normal budgetary processes that ensure the transparency and accountability of such spending.

Public procurement, or the way government buys higher-valued goods, services and works, seems a dull issue to most people – simply logistics managed by bean counters. Yet public procurement accounts for roughly 20 percent of government spending in many countries – making the sums involved enormous. Usually, governments dish out this money according to multi-annual procurement plans, following regulations in budget circulars, budgetary entity procurement rules, and in tender documents which these governments have spent months preparing individually.

Bad public procurement will represent one of the largest costs for such spending. Specifically, the tidal wave of Covid-19 spending will allow government bodies to avoid many of the usual controls on such spending. Such chicken-with-its-head-cut-off expenditure will also avoid the thoughtful outlay plans laid out in such legislatively required emergency planning

The procurement costs of Covid-19  

Many of the most important costs will stem from the use of direct award procedures. Typically, procurements can last from four weeks to six months. But direct awards can happen faster – with government agencies going online to find what they want to buy. Such direct awards bypass even the so-called “reverse auctions” (or auctions where the lowest price provider gets to sell to the government) that curb government costs every day. Economists of course often stand ready to contradict common sense. But when buyers have no choice over whom they buy from, patients must accept the going rate whatever that may be, given the market – which, in the case of a test for Covid-19, can be more than US$3,000.

Such direct awards have far reaching impact on the lengthy research and development and other innovation to help prevent the next crisis. Many countries’ procurement laws request or even require procedures such as the formation of “innovation partnerships” or “competitive dialogue with negotiation” in the tendering of R&D contracts. These procedures let governments talk with labs, scientists, and tech giants during the tendering process – and after – allowing them to procure innovative products and services. These drawn-out tenders can involve most of the industry’s leaders, which develop vaccines, new tests and other kits together.

Yet, haste leads to waste – especially when procuring innovation. Direct awards have already led to a useless test in the US. In Canada, the crisis has disrupted long-considered spending plans – diverting money toward quick, panicked research projects of questionable value. Rather than shortening supply chain response times, these direct awards have encouraged companies to muddle along – as they know a pound of purchasing cure beats an ounce of risk-planning prevention

Shortened or non-existent tendering deadlines – or the time which suppliers have to respond to invitations to bid – almost completely kill the usual way in which accountability and transparency in tendering are ensured.

First, shortened deadlines prevent losing bidders from making the complaints that play a vital part of procurement’s self-policing nature.

Second, a shorter or non-existing “standstill period” (or time for rivals and others to complain about illegal behavior) makes prevention far less likely than cure. Because contracts are flowing so quickly, few agencies have the time to follow up on clarifications or do the kind of first-round administrative review that catches most procurement problems.

Third, less time means less audit work, checking of spending, and less chance for investigative journalists and the public to exercise the oversight that helps uncover and stamp out corruption. 

To be sure, some governments require purchases above a certain threshold be put out to tender. In Singapore, this is set to only US$2,100). In Hong Kong, purchases of goods and services above HK$1.5 million (US$200,000) must be offered to foreign bidders. But without additional – not reduced – oversight, allocations such as the US$8.3 billion emergency coronavirus spending package in the US will deprive the public coffers of funds needed for post-crisis planning.

Public procurement to the rescue?

Crisis-ready procurement law – at the international and national levels – could help tackle future crises like the Covid-19 pandemic. This could encourage the market consultations needed to plan ahead. Normal procurement involves government agencies monitoring markets, sometimes spending years to find the right suppliers, develop the tender documents, choose the right procedure, and so forth. If governments worked with businesses (and each other) to anticipate tenders during a particular crisis, such a buy-in-case-of-crisis list could go a long way toward speeding up the crazy-slow responses observed almost everywhere.

An emergency oversight board could also help guide crisis-time procurement. Support for a Recovery Accountability and Transparency Board (RATB) emerged during America’s previous crisis in 2008-9. Yet nothing happened. Such a board could promulgate emergency procurement rules – and even liaise with central purchasing bodies in the US with others abroad. Like the idea for such a board, ideas for proactive procurement officials to serve on committees with other emergency planning officials also went unheeded.  

New York Governor Andrew Cuomo briefs media: The scramble by governments to procure medical equipment has turned ugly (Credit: Office of the Governor, The State of New York)

New York Governor Andrew Cuomo briefs media: The scramble by governments to procure medical equipment has turned ugly (Credit: Office of the Governor, The State of New York)

International crisis-ready procurement law could also lessen the impact of future crises. If Singapore had already pre-qualified Ukrainian medical suppliers ready to offer supplies to Singaporean hospitals at prices well below local prices, they could just pop in and supply. Many may complain about needing local supply to respond more quickly. The Europeans have dismissed such concerns: In the Spanish Contse case, the European Court of Justice held that having domestic supply when a foreign supplier could offer the same terms violated the non-discrimination principles underlying EU law. So why should others not do the same? Governments in the developed world need to use international procurement to source during crises far more effectively.

A legal framework already exists to allow for such a response. The World Trade Organization (WTO) Government Procurement Agreement (GPA) allows firms in signatory countries to compete for government contracts in other GPA countries. Asia-Pacific signatories include Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea and Taiwan – with Russia and China negotiating accession. The agreement requires that members treat other signing countries’ suppliers just like they treat their own (national treatment), and that any beneficial rules for one country’s bidders must apply to all countries’ bidders (the most-favored-nation principle). Other treaties – such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – impose similar requirements, as a way of promoting the GPA itself.

Yet procurement cannot fix everything. Knowing the limits of procurements to respond to crises may also help reduce backlogs for procuring things like masks (which the Hong Kong government did without tendering). Indeed, many scholars argue for direct cash payments to victims rather than goods and services.

Lessons to learn

Every crisis represents an opportunity. The bad procurements taking place right now to fight Covid-19 should encourage us to push for better procurement laws worldwide. The GPA and the CPTPP could stand as frameworks to deal with global emergencies affecting signatories. Large-scale appropriations adopted by legislatures worldwide (e.g. the 2020 Coronavirus Preparedness and Response Supplemental Appropriations Act in the US) might make more use of oversight boards like the RATB. Purchasing bodies – from hospitals to armies – should stop over-using what are effectively emergency powers enshrined in procurement laws. Instead, stand-by framework agreements, dynamic purchasing online, and pre-qualification schemes could keep a corps of firms at the ready for the next crisis, which will surely come.

Opinions expressed in articles published by AsiaGlobal Online reflect only those of the authors and do not necessarily represent the views of AsiaGlobal Online or the Asia Global Institute

Recent Articles

SIGN UP FOR INSIGHTS

Recent Articles